Question #24
Reading: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value
PDF File: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value.pdf
Page: 9
Status: Unattempted
Question
Given the following information, what is the forward exchange rate implied by interest rate parity? U.S. interest rate = 9%. North Korea interest rate = 10%. Spot rate = 1.65 KPW/$.
Answer Choices:
A. 1.665 KPW/$
B. 1.635 KPW/$
C. 0.612 KPW/$
Explanation
Forward rate (DC/FC) = Spot Rate (DC/FC) × [(1 + domestic rate) / (1 + foreign rate)],
Forward rate = 1 / 1.65 (KPW/$) × (1.09 / 1.10) = 0.60055 $/KPW, or 1.665 KPW/$.
Alternatively, forward rate = 1.65 (KPW/$) × (1.10 / 1.09) = 1.665 (KPW/$).